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Today's Market WrapUp 09.10.2007 Mon Tue Wed Thu Fri Kirby Archive Show Me
the Money The terms liquidity and liquidity add have been widely bandied about in the mainstream financial press in recent weeks. So I thought it might make a whole lot of sense to review exactly what constitutes liquidity injections. When the Fed conducts Open Market Operations, they are classified under 2 broad headings: TOMO – Temporary Open Market Operations These purchase and resale agreements [hence the name Repo] typically range in duration from 1 – 14 days. A one day Repo would have the Fed purchase collateral [Treasury Bond, Agency Bond or Mortgaged Backed Sec.] from the dealer’s inventories TODAY [at an implied yield] and have them sell it back to them tomorrow. This provides the dealer with temporary [overnight – 14 days] cash to fund their businesses. POMO – Permanent Open Market Operations These are outright purchases of bills, bonds and/or notes from the dealer’s inventories and constitute permanent additions to money supply. Interested parties can actually keep track of the most recent 25 Temporary Open Market Operations from the web site of the Federal Reserve Bank of New York linked here. Lately, the Fed has been adding via TOMO – a combination of 1 day or over-the-weekend Repos in conjunction with multi-day Repos. The term Repo is short for repurchase agreement. Those who deal in government securities use repos as a form of overnight borrowing. A dealer or other holder of government securities (usually T-bills) sells the securities to a lender and agrees to repurchase them at an agreed future date at an agreed price. They are usually very short-term, from overnight to 30 days or more. This short-term maturity and government backing means repos provide lenders with extremely low risk. Repos are popular because they can virtually eliminate credit problems. Unfortunately, a number of significant losses over the years from fraudulent dealers suggest that lenders in this market have not always checked their collateralization closely enough. When you view the “liquidity add” by the Fed – it is useful to view the Repo add pool in aggregate. For instance, if the Fed conducted 12 billion in 14 day Repos on Thursday and followed that up with 38 billion of over-the-weekend Repos on Friday – then the net aggregate add would be 50 billion worth of ‘new cash’ in the banking system that did not exist on Wednesday. Now of course, the 38 billion added on Friday ‘runs off’ on Monday. But then the question is how much the Fed will add on Monday and for how long? This does however beg the question, if the outstanding “temporary” Repo pool never really diminishes – is it really temporary? The turmoil we are currently experiencing in global financial markets has primarily arisen from market players FIRST being unable to ‘sell’ their mortgaged backed debt paper and has SUBSEQUENTLY spread to other form of asset backed debt instruments. In other words, debt paper that was formerly ‘readily fungible’ quickly became illiquid. This is also commonly referred to as the financial / credit markets ‘seizing up.’ In the definition of ‘Repo’ above – you will notice that historically – Repos conducted by the Federal Reserve have always been limited to Government Securities. But to counter the seizure outlined above - what has been occurring recently – in the wake of the sub-prime / CDO melt down – the Fed has been conducting Repos for increasingly larger amounts of Agency [like Fannie Mae] Bonds and Mortgaged Backed Securities [MBS] as demonstrated in one of their more recent Open Market Operations [7 Day Repo last Thursday] here:
The Double Edged Sword Of Liquidity Injections On the positive side of things – the liquidity being injected into the financial system by the Fed has meant that otherwise unmarketable debt paper has found TEMPORARY homes. Whether or not this provides a long term resolution to what ails the monetary system is open for conjecture – it’s really a question of faith and confidence, so stay tuned. The downside of these collective liquidity adds is that they have bloated money supply which is highly inflationary. As followers of John Williams, a frequent guest on Jim’s Financial Sense News Hour, of Shadow Government Statistics might already be aware: JOHN
WILLIAMS' SHADOW GOVERNMENT STATISTICS PLEASE NOTE: The SGS-Ongoing M3 data will be posted this weekend along with publication of a Flash Update. -- Best wishes to all, John Williams Fed Liquefaction Pushes August M3 Growth Towards 14% This afternoon's money supply release showed seasonally-adjusted M2 for the week-ended August 27th up by $64.9 billion to $7.400 trillion. M2 now has risen by $111.1 billion for the last two weeks, rising at an annualized fortnight growth rate of 48.2%. Depending on the large time deposit numbers due for release on Friday (tomorrow) afternoon, annual M3 growth for August could jump to 14.0%, up from July's 13.0%, and up from my early August estimate of 13.6% made last week. Despite the Fed coming close to its formal 5.25% fed funds target in the last couple of days, the liquidity crisis continues, and the financial markets remain extremely unstable and dangerous. Once again, watch the dollar! With money growth ‘vectoring’ up in this fashion - at least we should ALL be able to rest assured that a global deflation is not in the cards. Today’s Market Overseas equity markets began the week on a sour note with Japan’s Nikkei Index falling 357 points to 15,764. North American markets had a mixed day with the DOW up 14.5 to 13,127.8, the NASDAQ off 6.59 to 2,559.11 and the S & P down 1.85 to 1,451.70. NYMEX crude oil futures gained 1.41 to close at 78.11 per barrel. On foreign exchange market the U.S. Dollar Index fell .06 to 79.85. Interest rates were about 4 basis points easier across the curve with the benchmark 5 yr. bond ending the day at 3.99% and the 10 yr. finishing the day at 4.33%. The precious metals complex ended the day mixed with COMEX gold futures finishing the day up 2.10 per ounce while COMEX silver futures gave up .01 to end the day at 12.56 per ounce. The XAU Index fell .12 to 151.41 and the HUI Index dropped 1.80 to 356.33. On tap for tomorrow, at 8:30 a.m. July Balance of Trade data is due – expected -58.0B vs. prior -58.1B. Wishing you all happy thoughts and a pleasant evening! Rob Kirby Copyright © 2007 All rights reserved. Contact
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